The 3 Things That Keep Companies Growing

This article originally appeared on HBR.org (subscription may be required).

Growth creates complexity, and complexity is the silent killer of growth. This paradox explains why only about one company in nine has sustained more than a minimum level of profitable growth during the past decade, and why 85 percent of executives blame internal factors for their shortfall, not external ones beyond their control. The roots of sustained performance start deep inside.

HOW WE CAN HELP

Our research shows that, despite their many differences, most companies that achieve sustainable growth share a common set of motivating attitudes and behaviors that can usually be traced back to a bold, ambitious founder who got it right the first time around. The companies that have grown profitably to scale, while maintaining the internal traits that got them there in the first place, often consider themselves insurgents, waging war on their industry and its standards on behalf of an underserved customer, or creating an entirely new industry altogether. Such companies possess a clear sense of mission and focus that everyone in the company can understand and relate to (in contrast with the average company, where only two employees in five say they have any idea what the company stands for). Companies run in this way have the special ability to foster employees’ deep feelings of personal responsibility (in contrast with the average company, where a recent Gallup survey shows that only 13 percent of employees say they are emotionally engaged with their company). They abhor complexity, bureaucracy, and anything that gets in the way of the clean execution of strategy. They are obsessed with the details of the business and celebrate the employees at the front line, who deal directly with customers. Together, these attitudes and behaviors constitute a frame of mind that is one of the great and most undervalued secrets of business success.

We call it the founder’s mentality.

In our analyses, surveys, and interviews, we’ve found a consistently strong relationship between the traits of the founder’s mentality in companies of all kinds—not just start-ups—and their ability to sustain performance in the marketplace, in the stock market, and against their peers. Since 1990, we’ve found that the returns to shareholders in public companies where the founder is still involved are three times higher than in other companies. The most consistent high performers exhibit the attributes of the founder’s mentality four to five times more than the worst performers. Furthermore, we’ve determined that of the roughly one in ten companies that achieve a decade of sustained and profitable growth, nearly two in three are governed by the founder’s mentality. These are all remarkable numbers.

All too often, however, companies lose the founder’s mentality as they become larger. The pursuit of growth and scale adds organizational complexity, piles on processes and systems, dilutes the sense of insurgency, and creates challenges in maintaining the original level of talent. These sorts of deep, subtle internal problems, in turn, lead to deterioration on the outside.

How else to explain the disappointments of companies that once dominated their business and seemed to have everything—growing markets, massive investable funds, proprietary technologies, best-known brands, leadership in their channels? In the 1990s, for example, Nokia rocketed to the top of the handset market. During that decade, we estimate, the company captured more than 90 percent of the market’s global profits and seemed poised to maintain its leadership for years to come. It even was putting in place many of the elements for next-generation smartphones: it had developed some of the earliest small-touchscreen technology, was the global leader in selling tiny cameras, had learned how to distribute music, and was one of the first companies to offer free e-mail on its phones. Yet somehow, overloaded by its own growth and blinded by its burgeoning organizational complexity, the company failed to capitalize on its advantages and take the lead in developing next-generation phones, despite calls from some of its own engineers to do just that.

None of this stemmed from a lack of resources or opportunity. Nokia sat on top of one of the biggest growth markets the world had ever seen, and on top of one of the biggest piles of cash in history. But instead of thinking like an insurgent and investing in the future, it gave out 40 percent dividends and used its cash to buy back large quantities of its own stock. Within just a few years, Apple, Samsung, and soon Google had seized the smartphone market, and Nokia, once a model of innovation and insurgent-style thinking, was in steep decline.

How can you avoid the fate of Nokia? How can you stay on the path to sustainable growth?

Start by assessing how your company rates on the elements of the founder’s mentality. On your own, or with your team, take this survey. For best results, interview front-line employees and customers to assess how well your company embraces the founder’s mentality.

Do we share the ambition to become the scale insurgent in our industry?

Can we learn from competitors, especially newly emerging insurgents, who embody the founder’s mentality better?

How do answers to these questions change our business priorities?

It doesn’t matter if your company is decades removed from the era of its founding. Our point is that just about every company, at any stage in its life, can benefit from the attitudes and behaviors that make up the founder’s mentality. Young companies need to build the founder’s mentality; older companies need to rediscover or even redefine it.

This post is excerpted from the Harvard Business Review Press book The Founder’s Mentality: How to Overcome the Predictable Crises of Growth.

Chris Zook is a partner in Bain & Company’s Boston office and has been a co-head of the firm’s global strategy practice for twenty years. He is a co-author of a number of bestselling books including Profit from the Core and The Founder’s Mentality: How to Overcome the Predictable Crises of Growth (Harvard Business Review Press, June 2016).

James Allen is a partner in Bain & Company’s London office and a co-head of the firm’s global strategy practice. He is a co-author of a number of bestselling books including Profit from the Core and The Founder’s Mentality: How to Overcome the Predictable Crises of Growth (Harvard Business Review Press, June 2016).